Pension cap creates a property dilemma

For self-managed super fund property investors, super's “new” rules and surrounding framework are a long way from being clear.

Draft legislation has been out for comment for a few weeks, and SMSF experts are falling over themselves to point out fresh dangers and risks that will come with the new rules.

And, speaking of which, the rules that seemed almost certain a month or so ago are, again, back up in the air, with Labor switching and arguing for even tougher new contribution limits. But I'll come back to this.

Property warning I: Partial segregation/transfer of assets

The new concern for SMSF property investors from the draft legislation comes for those who are likely to bust the $1.6 million transfer balance cap.

Some senior SMSF lawyers believe there is a big gap between what the new legislation says and what the Australian Tax Office has traditionally allowed.

The ATO has, traditionally, not accepted partial segregation of assets. That is, you can't put a portion of an asset into pension, leaving a portion out in the accumulation fund.

The issue is probably best explained with an example such as the following:

A SMSF has assets of $2m, which include a property worth $800,000. The “other” $1.2m of assets might automatically go into the pension, leaving $400,000 of the cap left. Common sense would suggest that you would then be allowed to transfer 50 per cent of the property, or $400,000, into the pension fund.

At some later stage, if the $800,000 property was sold for, say, $1.2m, then half of the gain would be taxed in accumulation and half (not) taxed in pension.

Surely, this makes complete sense. And to many experts, it does. However, the ATO has traditionally not believed in the partial segregation/transfer of assets. The draft legislation, according to Dan Butler, one of the best SMSF lawyers in the business, seems to suggest that it will be allowed. But the ATO is the regulator and is, inevitably, left to determine rulings. So clarification, at some stage, will be required.

Property warning II: Off-the-plan purchases

Further warnings are also circulating about SMSFs buying off-the-plan property, with unconditional finance clauses.

There is an increased volume of high-rise development properties hitting the market. And finance disaster stories are becoming a daily occurrence for SMSF investors.

Banks traditionally won't offer unconditional financing on properties being built by developers, until very near completion. They will wait until approximately three months out from completion to make their financing offers to purchasers.

However, with the flood of properties coming on the market, and pressure coming on those high-rise developments, banks are backing away, or simply changing their finance requirements.

Don't sign anything regarding a geared property purchase in your SMSF with finance clauses that are unconditional. Banks are prone to changing their minds on lending – for example, if they no longer like the suburb, or a particular development; or they won't lend on the same loan-to-valuation ratio; or feel over-exposed to a given area.

The ramifications for SMSFs are potentially huge. You could lose your deposit and be sued by the developer for losses and costs, if you are unable to settle on the property on the agreed date.

What's Labor up to?

When it comes to superannuation, Labor has become “super limbo champion”.

Labor is literally bending over backwards to have almost every super bar lowered. If there is a superannuation race to the bottom, there is no question as to who is leading.

Despite having very vague commitments to attacking super prior to the election, it has now found some courage and appears to want to beat the already crippled super to death.

Take this, for example. Labor now no longer supports the reduction in the non-concessional contributions limit from $180,000 to $100,000.

It now wants to see the limit for NCCs dropped to $75,000.

Prior to the election, it supported reducing the “high earners” tax rate of 30 per cent on super contributions kicking in at $250,000 a year. The Coalition matched that at the Budget.

Labor is now demanding that be dropped to $200,000. That is, anyone earning more than $200,000 a year, should pay 30 per cent contributions tax on what is put into super for them.

And, more recently, it has voiced opposition to the five-year 'catch up' provisions, which would allow people to use up to five previous years' concessional contribution limits in one year.

As I said when the Coalition first announced its original super recommendations in the May Budget, the package went way further than any Labor, or even Greens, initiative would have gone had they been in government. It was change on a scale no-one had predicted.

The non-governing major parties couldn't believe they had been undercut. But some feel Labor is putting up a token front for some political mileage … and will pass the Coalition's pretty tough new measures when called to vote.

The information contained in this column should be treated as general advice only. It has not taken anyone's specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is a licensed financial advisor, a mortgage broker and an expert on self-managed super funds. He is a regular contributor to Eureka Report. To contact Bruce, please click here.